Licking the Log

American workers, as a whole, are facing a disagreeable disorder. Their debt burdens are increasing. Their incomes are stagnating.

There are many reasons why. In truth, it would take several large volumes to chronicle all of them. But when you get down to the ‘lick log’ of it all, the disorder stems from decades of technocratic intervention that have stripped away any semblance of a free functioning, self-correcting economy.

Happy workers from the distant past…

The financial system circa 2017, and the economy that supports it, has been stretched to the breaking point. Shortsighted fiscal and monetary policies have propagated it. The result is a failing financial order that has become near intolerable for all but the gravy supping political class and their cronies.

Take consumer spending. This is the primary driver of the U.S. economy. Yet it requires vast amounts of credit. In fact, American consumers presently hold $1 trillion in revolving credit. At the same time, they have nowhere near the income needed to finance these debts, let alone pay them off.

Remember, the flip-side of credit is debt. Obviously, the divergence of increasing debt and stagnating incomes is a condition that cannot go on forever. But it can go on much longer than any sensible person would consider possible.

The consumer revolving credit mountain – back at its previous peak – click to enlarge.

Debt Slaves

If you haven’t noticed, the financial services industry is extremely accomplished at compelling people to go whole hog into debt. Moreover, the entire fiat based financial system, which depends on ever increasing issuance of debt, hinges on it. Just a slight contraction of credit, like late 2008, and the whole debt repayment structure breaks down.

On an individual basis, there are only so many credit cards that can be maxed out before the shell game ends. Wolf Richter, of Wolf Street, recently clarified the relationship between the economy and deep consumer debt:

“The US economy is fueled by credit. Americans turning themselves into debt slaves makes it tick. Take it away, and what little growth there is – nearly zero in the first quarter – will dissipate into ambient air altogether. So it’s time to take the pulse of our American debt slaves.

“In a new study, life insurer and financial services provider Northwestern Mutual found that 45 percent of Americans that have debt spend ‘up to half of their monthly income on debt repayment.’ Those are the true debt slaves.

“Excluding mortgage debt, Americans carry an average debt of $37,000. Of them, 47 percent carry $25,000 or more, and more than 10 percent carry $100,000 or more in debt, excluding mortgage debt. Most of them expect to get out of debt before they die, but 14 percent expect to be in debt ‘for the rest of their lives.”’

Debtor’s prison, new and old.

The Coming Debt Reckoning

Consumers with elevated debt levels are playing a high risk game. They are one job loss or illness away from losing it all. Even without such difficult life events, the compounding interest of massive amounts of debt relentlessly pile up like straw upon a camel’s back. Eventually the breaking point is crossed.

The process may be subtle at first. Later it’s abrupt. Here we turn to a brief dialogue from Ernest Hemingway’s 1926 novel, The Sun Also Rises, for a succinct explanation of the process of going broke:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

By our estimation, the gradual trickle toward bankruptcy for many Americans is giving way to the sudden deluge. On an individual basis, greater amounts of debt may be a temporary solution to a debt problem. But greater amounts of debt gradually compound to a sudden bankruptcy.

First-quarter GDP , reported last Friday, came in at an annualized rate of just 0.7 percent. Of this, personal consumption increased just 0.3 percent. Up and down, in and out, of the economy, consumers are struggling. Some are attempting to tighten their belts. Others are at the end of their rope. Is it any surprise that retailers are shuttering stores at a record clip?

Retail drama… at least timberland should continue to boom.

Obviously, the effects of consumer retrenchments will spread out beyond just retail. Commercial real estate, manufacturing, shipping and transportation, automotive, oil and gas – you name it. A coordinated supply glut, fueled by excess debt, is upon us.

Make of it what you will. By our estimation a debt reckoning is coming, and that doesn’t even account for government debt. What better time than now to get one’s financial house in order?

Chart by: St. Louis Fed

Chart and image captions by PT

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

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